Jun 14, 2005

CDOs and Market Failures

From the FT:
When Bank of America and Banca Popolare di Intra declared a truce in their long-running dispute over alleged derivatives mis-selling last week, they chose an odd time to release the news.
...
But, discreet or not, the news of this settlement is likely to provoke considerable debate among lawyers and investment bankers in coming days. Over the last five years, the CDO market has expanded rapidly and also moved to a new level of product complexity. Consequently, the question that worries some industry observers - particularly since credit conditions have become more volatile - is whether the BPI/BoA deal could be the precursor to a host of similar lawsuits.
I had not heard of this lawsuit before today. CDO's seem to be in danger of losing their status as a modern financial miracle.

This story of market failure (relating to GM/Ford downgrade) was also news to me. It seemed like pretty standard action for bonds as they jump across the great divide between credit grade and junk. A big dislocation and about 2 weeks to sort out forced sellers and new buyers. The Kerkorian bid spiced it up a bit but as he was buying in size it seems he would have done an aweful lot to relieve any panic. I am not active in corporate markets so maybe I am clueless about the horrors that transpired. With the SPX above 1200 I guess I have lots of company.

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